One of the impacts of Brexit that some organizations may have overlooked relates to the movement of own goods/ the provision of goods within a corporate group and what happens when those goods cross a customs border.
The overlooked area
Many multinational groups centralize functions such as IT and the provision of spare parts. It is common to see goods owned by businesses with multiple establishments moved between locations based on their needs. For those where establishments are solely in Great Britain (England, Scotland, and Wales), this movement has no VAT impact unless there is a transfer of the right to dispose of goods as owner. However, where there is a movement of goods between establishments based in the EU (or Northern Ireland) and GB, businesses need to be aware of the implications for VAT and customs.
When the UK was part of the EU, these supply chains operated efficiently with minimal VAT reporting required and no customs duty consequences when goods moved to/from the UK and EU. However, with Brexit came the UK’s exit from the EU Customs Union and the simplifications with membership. This meant that the movement of goods became subject to import taxes when moved between GB and the EU in the same way as a general supply of goods between GB and third countries.
For business in both GB and the EU, two indirect tax questions that arise when moving goods between the two are 1. What import taxes are due, and how can I recover any import VAT suffered? 2. Are there any “supply” VAT consequences of the movement?
Recovery of import VAT
When moving own goods and assets, it is pivotal to clarify who will act as the importer of record and who has ownership of the goods on arrival into the acquiring entity’s country. Where an entity acts as the importer of record, it will be responsible for declaring import VAT and any customs obligations and payment of those. In most countries, the local rules will require that the entity is the owner of the goods to recover the import VAT (either through a VAT return or directive claim).
So how does this work in practice? Commonly, multinational businesses will move assets (IT equipment) or goods between group entities for use or onward supply locally. Where either is transferred to the UK from an overseas location, import VAT and potential duties become due. Where this refers to assets, it is common for the original overseas entity to retain ownership, usually because the assets will be returned at some point. As a result, only the entity owning the assets would be likely to have the ability to recover any UK import VAT paid, even where the recipient of the assets may be the importer of record. Without a VAT registration, this would need to be via a one-off claim. Customs Duty may also be incurred on the importation, which adds an irrecoverable cost.
Potential “supply” VAT obligations
In addition to the impact on import VAT recovery, businesses should also be mindful of what point (if ever) ownership changes. Suppose ownership is changed to mitigate any issues with import VAT so that title passes after the goods have been declared into the UK. In that case, a local supply will likely be deemed to have been made, and as a result, VAT obligations arise for the “supplying” entity. This is because they would be considered to have made a domestic supply in the UK. Similar principles would also apply for goods transferred from the UK to the EU and subsequently sold. It is worth noting that this obligation varies depending on the destination country for the goods and whether the entity deemed to have made the supply is non-established.
In addition, it’s not just widgets and IT equipment where care is needed; more unique scenarios are also subject to the rules. What if a guide dog charity travels with its canine companions to another country? Surprisingly to some, these dogs would not be considered ‘pets’ in the generic sense. As a result, they would be regarded as physical assets of the charity and subject to import VAT like other goods.
Mitigating any issues
Where goods are being moved cross-border between two group companies, the simplest way to ensure VAT recovery and no additional VAT obligations is to make the acquirer of the goods or assets the importer and owner. This is because the acquiring entity already has a VAT registration in the destination country, resulting in the ability to recover the import VAT and preventing the overseas entity from having any obligations.
This also assumes that the acquirer is happy to be recorded as the importer of record, as there have been instances of group companies rejecting the position as an importer of record because they did not want to suffer any duty, which is irrecoverable. We have therefore seen several groups keeping stock in Europe as opposed to the UK, to mitigate the level of goods that flow in and out of the EU area from the UK, which in turn reduces the value of import VAT and potential duty suffered,
If there is a single entity moving goods between two countries, there is less freedom to mitigate the issues. That entity would likely be subject to VAT obligations despite there being no supply. We would expect businesses to require a VAT registration to not just account for local VAT (for the supply of goods held in that country) but also to recover import VAT.
In addition, where goods are moved between GB and NI, the rules depend on whether the goods or assets are moved to or from Northern Ireland, with those moving to NI subject to the same rules as other EU member states.
Finally, where goods and assets are brought into the UK temporarily, HMRC does provide reliefs specific to each that may lead to the removal of any import VAT and duty being paid. Therefore, each supply must be reviewed individually to ensure that businesses can use any potential reliefs. Still, vice versa, do not get caught by the ownership requirements, which could see businesses suffering irrecoverable costs if not planned correctly.